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When Fewer Choices Are Worth More

Knowledge@Wharton

Republished with permission from Knowledge@Wharton, the online research and business analysis journal of the Wharton School of the University of Pennsylvania.

In matching environments such as the world of online dating and labor markets, it’s not enough to find someone you like — you also have to find someone who likes you back. Competition is the name of the game, and if the field is crowded, how is a person able to stand out?

For those who are sick of being alone, weary of being asked when they plan to get married or otherwise sensing that their time is running out, the solution may be to limit their choices — and, more importantly, the options of others. It’s more than just a successful dating strategy; it also may be a lucrative business model. New research by Hanna Halaburda, an economist at the Bank of Canada and former Harvard Business School professor, Mikolaj Piskorski, professor of Strategy and Innovation at IMD Business School in Switzerland, and Wharton marketing professor Pinar Yildirim finds that not only can companies offer limited choices to consumers and still successfully compete with their peers, but may also be able to charge more.

“You want to satisfy the customer and you want the customer to find the best possible match, so the idea of limiting options at first sounds really counterintuitive,” Yildirim notes.

“The secret sauce of eHarmony is that it does not allow you to browse; it gives you a limited number of choices. So you have fewer choices, but so do the people with whom you’ve been matched. So when you write to them, your chances of getting a reply are higher.”–Mikolaj Piskorski

In “Competing by Restricting Choice: The Case of Search Platforms,” the authors focus on the online dating scene — specifically, on eHarmony and match.com. While Match offers a free platform that allows users to search for potential partners with few restrictions, eHarmony charges a subscription fee and shows people fewer possible mates with the promise that its matching algorithm will offer a better shot at a long-term relationship. The researchers created a model to determine how each type of business approach could successfully coexist within the market.

The reason both models are able to thrive, the researchers say, is all about trade-offs. If a consumer feels a sense of immediacy to find a match, then it may be worth it to restrict the amount of competition he or she faces in doing so. But if someone is content with his or her current circumstances and willing to play the field for a while, swimming in a very large pond will not be of as much concern. This effect isn’t just confined to online dating, Yildirim notes — it applies any time a company is providing a platform where both sides have to consent to a match, including job hunting or real estate.

“If I operate a buyer and seller platform in real estate, and I tell buyers they can only look at 10 houses at a time, and that sellers will only show houses to 10 potential buyers at a time, would this company be more successful compared to one that may be showing 100? We think that it can,” Yildirim says. “A user may need to move into a house right away; for the dating environment, it might be someone who feels like they have to get married as soon as possible.”

“If I operate a buyer and seller platform in real estate, and I tell buyers they can only look at 10 houses at a time, and that sellers will only show houses to 10 potential buyers at a time, would this company be more successful compared to one that may be showing 100? We show that it can.”–Pinar Yildirim

In its ads and other marketing efforts, eHarmony touts its matching algorithm as the reason users are more likely to pair up, and ostensibly, why it’s able to charge more. The site “appeals to people who are more serious about getting into a relationship,” Piskorski says. But even without all those attributes, even if the algorithm is not at all accurate, the researchers say, eHarmony still provides a unique benefit to users by limiting competition on both sides of the match.

The traditional explanation for why it can make sense to limit choice is because people get overwhelmed by the number of options and decide to walk away rather than pick just one or two. But in matching markets — i.e., arenas in which a match or a transaction only occurs when both sides say yes — there is a different driving force at work. “Even if there is no information overload, it’s good to have less choice … because there is less competition,” Halaburda says. “That is why this result comes up in two-sided markets, but doesn’t come up in a regular market.”